RELATED COMPANIES

x

Loading data...

x

Loading data...

ChartsValuation & Peer ComparisonCommunity Buzz

Close ✕

Even for an industry that has always been inherently vibrant, last week was unusually eventful for aviation. It began with the news that a sale of stake by Jet Airways, India's second-largest carrier by passengers carried, to Abu Dhabi's fast-growing airline, Etihad Airways, will be delayed. If the news was disconcerting, Jet didn't show it.

The airline cut fares by nearly a half on Tuesday, mimicking a move by budget carrier SpiceJet in January, when Indian air travellers had become accustomed to the idea that the era of cheap airfare was history. A day later, the Tatas said they were taking another shot at aviation partnering Malaysian budget carrier AirAsia. Turns out runaway airfares will be history.

Understandably, in the euphoria over lower airfare, the news concerning Jet receded into the background. Yet for Indian aviation, a Jet-Etihad deal trumps the other developments in significance. Falling airfares are a flash in the pan. SpiceJet's offer was a buffer against a lean travel season and Jet's price cut was nothing but a counter. As for the Tatas and AirAsia, these are early days to ascertain the success of their venture (see A New Kid..).

A New Kid on the Air Block

AirAsia's plan to enter the domestic aviation market partnering the Tatas is surprising on many counts. The airline's wariness about the Indian market is well-known because of its struggles on overseas routes from India since the launch in December 2008. According to consultancy Capa, the brand has struggled partly because of its inability to access local distribution networks. "Travel agents still account for most bookings in India but they have not supported AirAsia as they do not use the fee-for-service model," it noted in a recent report. Another impediment was its exclusive partnership with reservation website Expedia. India happens to be the only Asian market where the group has reduced capacity in the past year. It dropped out of three of the nine routes due to losses. The two busiest — Mumbai and Delhi —were dropped from the network in 2012 as part of a rationalisation exercise. Already, AirAsia CEO Tony Fernandes has indicated that he is skittish about flying between Delhi and Mumbai due to the high airport charges. Today, the carrier accounts for just 10% of seat capacity in the India-Southeast Asia market compared with 14% a year ago, says Capa. That said, the consultancy also noted that securing the right local partner could resolve many of the challenges AirAsia has faced in India. The airline seems to have done exactly that by roping in the Tatas. The Indian aviation industry as a whole may be in a shambles because it is a competitive and largely unprofitable market thanks to high fuel taxes and airport charges, but long-term growth opportunities are vast. Mohan Ranganathan, an air safety consultant, says the venture is likely to succeed. "Focussing on tier-2 and tier-3 routes in the south will feed AirAsia's larger network," he says. "Then there is the credibility of the Tatas."

A Jet-Etihad deal has the potential to be a game-changer, according to consultancy Capa. Despite the early hiccup, most aviation analysts say a deal is at hand because of the substantial benefits for both carriers (see Why Jet & Etihad...). Jet is starved for capital and Etihad, which has pushed alliances that give it strategic access in specific geographies, stands to grow in one of its most important markets.

India Shining

To fully understand Etihad's gains, we need to look at the airline from the lens of the other two big carriers based in the Persian Gulf — Emirates Airline and Qatar Airways. At a time when global rivals are pinching pennies, all the three carriers are hankering for new routes, shopping for planes and building or expanding their home airports. It is not hard to see why: they are wrapped in a cocoon of oil wealth.

If a deal with Jet materialises, it will be Etihad's fifth acquisition in a shade over a year. Being the youngest, Etihad is playing catch-up with its larger Gulf rivals by snapping up stakes in overseas airlines. Qatar for now is keen to tap opportunities closer home. Emirates has been content growing its network individually.

Indeed, all three have pressed ahead with different growth plans. Yet there is a common thread running through their strategies and fortunes — India. Essa Sulaiman Ahmad, vice-president, India and Nepal, Emirates, says India is the largest operation in the airline's network. Etihad flies to six cities in India, the most in any country. Akbar Al Baker, the chief executive of Qatar Airways, says India is a key part of the airline's growth strategy, which is evident from its services to "the most number of destinations compared with any other country in our network or by any other international airline".

Source: Airlines, Aviation industry consultants

Indians also form the lion's share of their workforce (see The Gulf's Big Three). It is another matter that it's because they are inexpensive, deployed largely for the least glamourous tasks in aviation such as handling baggage or catering.

Given this backdrop, a direct confrontation with each other is inevitable. To date, Emirates is by far the most successful of the three. Its progress in India mirrors its global push, building routes to a country that was simply ignored or forgotten by rivals. Indians who form the biggest expatriate population in the region have long been one of Emirates' principal growth engines. More than 1.7 million Indians live in the UAE (of this, nearly half live in Dubai) while 0.5 million Indians live in Qatar, according to the Ministry of Overseas Indian Affairs.

Geography too was critical to its success. Roughly two-thirds of the global population live within an eight-hour flight while the rest live within four hours from Dubai. It shouldn't then be a surprise that seven airlines, including five from India, fly to Dubai alone from as many as 17 Indian cities. In an earlier interaction, Lorne Riley, head of corporate communications of Dubai Airports, said India was the topmost market, accounting for 6.84 million air travellers in 2011.

A Three-Way Race

As an early mover, the biggest beneficiary of this growth has been Emirates. Still, that does not explain how the carrier has come to fly 185 times a week from Dubai to 10 cities in India, considerably higher than any other international carrier. Emirates' edge over rivals stems from the air traffic rights that Dubai secured from India as part of the "open skies" policy pursued by the government since 2004-2005. These arrangements, known as Air Service Agreements or bilaterals (see What are Air Service Agreements...on next page) in aviation parlance, are one of the darkest legacies of former aviation minister Praful Patel. Patel has on many occasions denied any wrongdoing.

But the audacious manner in which flying rights were handed to foreign carriers was severely criticised by India's national auditor. In a 2011 report, the CAG chronicles events relating to the India-Dubai sector to illustrate the liberal grant of rights. Between 2005 and 2010, Dubai's bilateral entitlements grew from 10,400 seats to 54,000 through a series of MoUs.

The CAG notes that "Emirates was able to derive substantially greater traffic under the Dubai bilateral (due to 6th freedom traffic — passengers flying between two countries while stopping in one's own country — and access to 10 points of call in India) while Indian carriers were essentially carrying only 3rd or 4th freedom traffic (between India-Dubai)."

The 6th freedom traffic is not, in a strict sense, illegal. Saj Ahmad, chief analyst of StrategicAero Research.com, a consultancy based in London, says as air travel continues to grow, the increase in bilaterals and other open skies agreements are par for the course. "In turn, 6th freedom traffic rights have also expanded as a result; so in a way you could argue that this is indeed the new norm for the industry and is also part of the reason why co-operation, not competition on treaties is the way forward."

Nevertheless, the CAG report draws attention to the one-sided nature of benefits to Emirates despite state-run Air India's repeated protests at "the lack of reciprocity". It highlighted the Dubai authorities' refusal to agree to requested reciprocal arrangements for Air India, citing "acute infrastructural constraints" at the Dubai airport. Indian officials overlooked the Dubai airport's status as one of the biggest in the world. Terminal 3, which is reserved for Emirates, is not only the world's largest air terminal, it is also the world's largest building.

The Bilateral Factor

The India head of a foreign airline speaking anonymously pointed out that the UAE is the only country that has managed to obtain bilaterals from India for four of its emirates — Dubai, Sharjah, Abu Dhabi and Ras Al Khaimah. "It is the same as Kerala and Karnataka asking for traffic rights."

A former official of the aviation ministry says the arrangement with the UAE is peculiar and very suspicious. "Air India is essentially servicing probably five airports and in return we have opened up nearly 20 airports to airlines from that region," he says, asking not to be named. It is not for nothing that Emirates is known as India's national carrier. But the airline is hardly the sole beneficiary of the generosity of Indian authorities. Entitlements to Qatar, for example, have grown from 5,372 seats in 2005 to 24,292 currently.

The bilaterals remain a prickly topic for the aviation ministry. Information on the subject on the website of the aviation regulator DGCA dates back to 2005. A senior DGCA official says the agency has strict orders from the aviation ministry against updating the rights to foreign carriers. This official too did not want to be named, fearing repercussions.

Indian private airlines, meanwhile, have complained repeatedly against the lack of opportunities in a lucrative sector. In an earlier interview, SpiceJet CEO Neil Mills said he wanted to diversify into more international routes to take pressure off the domestic market, but was yet to hear from the aviation ministry. Today, both SpiceJet's and budget competitor IndiGo's operations on the Dubai route (see How They Stack Up) are modest.

That is partly due to the fact that they are late starters; IndiGo launched services to Dubai in September 2011 and SpiceJet in June 2012 to comply with a rule that says Indian carriers must fly on domestic routes for five years before they expand overseas. Yet, the total number of seats apportioned to Indian carriers is still only 42,978 compared with the 54,200 allotted to Emirates and FlyDubai, Dubai's budget airline, according to data collated from the Dubai airport.

Not Enough

However, Emirates is still hungry for more seats from India. Last year, the carrier approached the National Council of Applied Economic Research (NCAER) to push its case with the Indian government. By contrasting the increase of seat allocation from the present 54,200 a week to 60,000, 70,000 and 80,000, a study by NCAER notes that "if the seats allocated to Emirates are increased, then the corresponding benefits to the economy and tourism sector will also increase".

The study establishes Emirates' advantage due to the extensive use of the 6th freedom right, revealing that 55% of its passengers flew to destinations beyond Dubai from India compared with the 45% traffic between India and Dubai. But it is also careful to highlight that only 18% of the 6th freedom traffic flies between points served by Indian carriers.

According to Tushar Nandi, the principal author of the study, the NCAER team worked on a brief laid down by Emirates. "They [Emirates] wanted to highlight that allocating more seats can be only good for India."

Nandi, who has since joined the Centre for Studies in Social Sciences in Kolkata, says the adverse effects of market concentration, a euphemism for Emirates' domination over the Dubai route, did not fall under the scope of study. "Adverse impacts in this regard are obvious for any sector, not just aviation."

So far, Emirates has benefited from generous approvals from Indian authorities. But the advantage may soon come to naught. One of the critical impacts of the Jet-Etihad deal is likely to be a relaxation of the India-UAE bilateral, according to Capa. Emirates' Ahmad says any further growth in the Indian market will be determined by government approvals. The rub is that with more players on the scene and greater media scrutiny, the bilateral is unlikely to be as one-sided as before.

Capa notes that Qatar apart, Turkish Airlines and Singapore Airlines too are waiting in the wings to expand bilaterals as they have exhausted their current entitlements. Indeed, Qatar's Al Baker says the airline plans to seek more landing rights in India, incorporate new destinations to its list and increase frequency on existing routes. The advent of AirAsia means there is another attractive alternative for Indian expatriates.

Bilaterals are important to the Gulf carriers because there is little to choose from the three in terms of fares or facilities. All three are known to woo travellers who represent the crowded and cosmopolitan facets of aviation. So, economy-class passengers are pampered with lavish meals and entertainment options while business and first-class flyers are welcomed with stunning interiors and showers onboard.

Manish Chheda, managing director of consultancy firm Auctus Advisors, says in a sense, they are all fighting for the same passenger. "If I am flying to Madrid, I could choose either of these airlines."

Whole New Ball Game

Etihad's deal with Jet must be viewed in the context of these realities. Mark Martin of Martin Consulting, a consultancy based in Dubai, says the rivalry between the Gulf carriers is becoming more and more aggressive. "Etihad's potential purchase of a Jet stake is, in a manner of speaking, sidestepping codesharing [reciprocal agreements between airlines that offer passengers more destinations and easier connections] or bilaterals." According to Capa, a key rationale of the proposed investment for Etihad is to provide greater feed from the Indian market to support its intercontinental services to Europe and the Americas.

The India head of the foreign airline who sought anonymity says Qatar can catch up with Emirates on bilaterals, but Etihad can't. "Hence, the deal with Jet." Craig Jenks, president of Airline/Aircraft Projects Inc, a consultancy based in New York, says the Emirates versus Etihad battle is global in scope. Etihad, he says, is substantially behind in size, global marketing clout and its home airport. "However Etihad is Abu Dhabi while Emirates is Dubai. This is the big difference. The former can still buy whatever it wants — I mean anything — not just airlines. Dubai got burnt by its property boom... its airline does very well, but the boss can't go out and buy anything and everything."

Jenks says the Etihad airline acquisition policy is a way to ramp up its global market share. "For example, an Air Berlin or [soon] Jet Airways frequent short-haul passenger within EU or India will be more likely to connect in Abu Dhabi airport when it flies long-haul."

Indeed, long-haul flights are key to the ambitions of all the three Gulf carriers. "Passengers, particularly business travellers who are the source of most airline profits, will pay more to not change planes," says Richard Aboulafia, an aviation consultant at the Teal Group, an American consulting company. That explains their big strides in markets like the US.

Emirates launched direct services to Washington DC last September and Etihad is due to follow this summer. Etihad's strategy in India centres on creation of substantial traffic to destinations in Europe and North America and of course, the Gulf. Both are offering passengers from India a one-stop connection to the US capital, says StrategicAero Research.com's Ahmad.

Not to be outdone, Qatar will start flights to Chicago from April 10. The airline has also announced the launch of six new international "gateways" in recent months, including Gassim in Saudi Arabia and Najaf in Iraq.

A New Order

A few Indian competitors are fighting back. IndiGo, India's biggest airline by passengers carried and the only one known to make consistent profits, is expanding operations to the Gulf, according to its president Aditya Ghosh. The carrier currently flies 16 times (to and fro) a day between India and Dubai and will connect Thiruvananthapuram with the city-state from March 1. Ghosh says keeping in mind the high travel demand, IndiGo will look to launch operations between Kozhikode and Dubai as a part of its summer schedule this year.

Yet, other financially-strapped Indian carriers should be worried. Aboulafia says most other airlines and lessors care solely about profit, pricing their products and running their businesses accordingly. But these players (from the Gulf), he says, are trying to preserve oil and gas wealth by converting it into something tangible — airlines, aircraft leasing, and aviation services. "They don't need to make money, at least not in the short term."

That makes them the best bets to inherit the future of air travel. Already, they have pulled global airline alliances, which offer passengers more destinations, easier connections and transfer of frequent-flier miles, to their hubs. Al Baker was quoted as saying: "When you cannot defeat someone, you've got to join them."

That sounds like bravado, but it also reflects the realities of a new era of aviation. The Capa report says the international aviation industry is adjusting to the impact of the unfettered global ambitions of these carriers.

According to Capa, the historical weakness of international services by Indian carriers means that nearly 40% of Indian international traffic travels to its final destination via an intermediate offshore airport. The Gulf hubs capture more than half of such flows. Most of the airlines seeking additional rights are 6th freedom carriers, which will further squeeze the foreign routes of Indian carriers. Not to forget AirAsia, whose operations will open a new line of confrontation on domestic and foreign routes.

The India head of the foreign airline quoted earlier says when the bilaterals are due for review, "nothing is going to change". Obviously, he is referring to the poor prospects of Indian carriers thanks to the staggering ambitions of the three Gulf carriers.